FILE PHOTO -- Billionaire activist-investor Carl Icahn gives an interview on FOX Business Network's Neil Cavuto show in New York, U.S. on February 11, 2014.

Reuters/Brendan McDermid/File Photo

NEW YORK (Reuters) - Investors have built up a large short position in investor Carl Icahn’s oil refining company, CVR Energy (CVI.N), in the past three months, according to Reuters data, as evidence mounts that the company’s gamble on the biofuels market is going sour.

Icahn has been one of the loudest critics of the federal biofuels program.

CVR, in which Icahn holds an 82 percent stake, had about 6.5 percent short interest overall as of mid-July, up from 5.2 percent at the end of March, according to the latest data available from Nasdaq.

That would translate to about a third of the stock not held by Icahn being borrowed by investors betting the company’s value will decline. Reuters was unsuccessful in efforts to reach investors in the company.

The rising short interest in CVR comes as the company’s massive gamble on U.S. biofuels credits shows signs of going wrong.

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The rising demand and limited supply for borrowed shares in CVR has triggered a spike in borrowing fees, from normal ranges of around 2 percent to nearly 19 percent this month, said Ihor Dusaniwsky, a managing director at financial analytics firm S3 Partners in New York. Its own tracking figures show short interest increased to about 6.7 percent of the available shares as of last week.

Although that seems to be a relatively small amount, it is actually a huge percentage of the shares available, given that insiders like Icahn do not typically lend out their shares to short sellers, Dusaniwsky said.

Counsel for Icahn did not respond to a requests for comment late on Tuesday.

BIOFUEL BET SOURS

U.S. biofuels regulations require refiners either to blend biofuels into gasoline or - in the case of companies like CVR that have no blending facilities - to buy credits from competitors. The regulation, the Renewable Fuel Standard, also allows companies to delay those credit purchases by a year.

Last year, CVR deferred some $186 million worth of biofuels credits that it was required to purchase under the regulation until 2017, in an apparent bet that prices would fall within 12 months. This year, it continued to build that position to more than $275 million, according to a Reuters review of CVR filings.

That bet looked brilliant in March, when the credits – known as RINs – slumped to a year-low of 33.5 cents. But it could now be a money-loser, because over the past four months RINs prices have nearly tripled to 89 cents.

That could be fueling the increased short interest in CVR, said Paul Cheng, an equity analyst with Barclays Capital in New York. "So far, since the beginning of the year, you’ve been on a losing streak. At some point, you have to ask yourself: ‘Do I want to continue betting on this?'" he said. "You are starting to see (investors respond).”

As a special adviser to President Donald Trump, Icahn urged him in February to alter the policy to lift the blending burden from refiners. Sources say environmental regulators are preparing to formally reject that proposal.

Those holding short positions in CVR have watched the stock get hit hard this year. The shares are down 27 percent in 2017, the worst performance of any U.S. independent refiner over the period, according to a Reuters analysis.

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The shares' decline has reduced Icahn’s stake in the company by $468.5 million.